Instructions:
After reading Chapter 6 in the Gapenski and Reiter text, answer the questions and solve the problems below. Responses should be in Times New Roman, 12 point font, one inch margins, single spaced. The completed assignment should not exceed 5 pages in length. If you use an Excel spreadsheet to solve the problems, embed your Excel work in the Word document using the embed function, allowing you to still only submit a single Word document. When you have completed the homework, return to the Assignments section of Module 4 to upload your work as a Word document. Your finished homework file should be named using the First initial of your first name_Your last name_Module 4 Homework (i.e., J_Smith_Module 4 Homework).
Questions
6.1 What are the primary differences between direct and indirect costs?
6.2 What is the goal of cost allocation?
6.3
a. What are the three primary methods of cost allocation?
b. What are the differences among them?
6.4
a. What is a cost pool?
b. What is a cost driver?
c. How is the cost allocation rate determined?
6.5 Under what circumstances should an overhead department be divided into multiple cost pools?
6.6 Effective cost drivers, and hence the resulting allocation system, must have what two important attributes?
6.8 Which is the better cost driver for the costs of a hospital’s financial services department:
patient services department revenues or number of bills generated? Explain your rationale.
Problems:
6.1 The housekeeping services department of Ruger Clinic, a multispecialty practice in Toledo, Ohio, had $100,000 in direct costs during 2015. These costs must be allocated to Ruger’s three revenue-producing patient services departments using the direct method. Two cost drivers are under consideration: patient services revenue and hours of housekeeping services used. The patient services departments generated $5 million in total revenues during 2015, and to support these clinical activities, they used 5,000 hours of housekeeping services.
a. What is the value of the cost pool?
b. What is the allocation rate if
● patient services revenue is used as the cost driver?
● hours of housekeeping services is used as the cost driver?
The following data pertain to problem 6.3:
St. Benedict’s Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows:
General Administration $2,000,000
Facilities $5,000,000
Financial Services $3,000,000
Selected data for the three support and four patient services departments are shown below:
6.3 Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for general administration and financial services is patient services revenue, while the cost driver for facilities is space utilization.
a. What are the appropriate allocation rates?
b. Use an allocation table similar to Exhibit 6.7 to allocate the hospital’s overhead costs to the patient services departments.